Chief executive officer’s report

Grindrod recorded an attributable loss of R1.91 billion in 2016 (2015: R1.43 billion), mainly as a result of extremely depressed market conditions in the first half of the year and impairments in Shipping and Freight Services Rail businesses.

A headline loss of R459.5 million and headline loss per share of 61.2 cents is reported for the year (headline earnings 2015: R558.8 million and headline earnings per share 2015: 74.4 cents). Headline earnings were impacted by net foreign exchange losses of R138 million, arising primarily from the Mozambican operations and UK investments.

In the second half of the year, business performance improved as increasing demand supported commodity prices. The annual average and year-end prices of three major commodities in the Grindrod logistics chain were: thermal coal averaged US$64 a tonne in 2016, but ended the year at US$83, iron ore averaged US$58 and closed at US$76, while copper averaged US$4 867 and ended the year at US$5 523.

Improved demand in the second half of the year is reflected in Grindrod’s dry-bulk terminal utilisation, which increased from an average 41 per cent in the first half to 69 per cent in the second half of the year. Capacity in the Matola and Richards Bay dry-bulk terminals is fully contracted in 2017.

In the first half of the year, dry-bulk shipping rates slumped to historical lows (H1 average indices: Handysize US$4 107; Supramax US$4 741) and then began recovering (H2 average indices: Handysize US$6 387; Supramax US$7 599), driven by increased dry-bulk commodity demand, a significant number of vessel scrappings and a slow-down in new-building deliveries.

Rates in the tanker market declined during the year, reflecting the effects of the high product stock levels and further new-building deliveries particularly in the first half of 2017.

The rail manufacturing businesses continued to experience constraints with the cancellation of planned capital investments in mining projects in Africa. Given the subsequent anticipated inability to secure the desired, sustainable return in these businesses, the Grindrod strategy was reviewed and a decision was taken to withdraw from the rail manufacturing businesses. Further impairment of R644 million across the Rail business have been raised.

The rest of the businesses are aligned to the Grindrod strategy, namely to grow the business organically, by acquisition and seeking synergies within the group, with specific focus on Africa, to become a fully integrated freight and logistics service provider.

Business performance

Management focused on mitigating the effects of the markets, through restructuring businesses for improved efficiency, exploring inter-group synergies, brokering more favourable rates for customers in partnership with other logistics service providers to retain volume, negotiating contracts with existing and new customers and laying the foundation for commodity diversification.

Maputo Port despite challenging conditions in the first half, maintained its profit due to the recovery in volumes in the second half of 2016.

The 75-km dredging project to make the port accessible for fully laden panamax vessels was completed in January 2017 and has already shown benefits with increased volumes in the last quarter of 2016. Other investments in the port included improving berths, roads and paved areas. The project to deepen the Grindrod TCM berth to accommodate the larger vessels and is scheduled for completion during August 2017.

Terminals recorded low utilisation in the first half of the year. Utilisation improved in the second half and further improvement is expected in 2017 following concerted efforts to extend current contracts and to secure competitive integrated logistics chain costs.

Progress with the development of a petroleum-products terminal in the Port of Ngqura (Coega) by Oiltanking Grindrod Calulo (OTGC) was made when the long-term concession agreement between Transnet National Ports Authority (TNPA) and OTGC was signed in December 2016. Customer engagement has recommenced and a final feasibility study is expected during the second half of 2017.

Rail performance slumped due to lack of demand, the postponement of capital investments in green-fields infrastructure and aggressive road-haulage rates. This was partially offset by good performance in the rail leasing businesses. No further material rail contracts have been secured since the beginning of 2015, prompting the decision to exit the businesses.

Carrier Logistics maintained profitability despite severe market challenges in both the auto- and fuel-transportation businesses.

Grindrod Intermodal, which recorded improved financial results during the latter part of 2016 following business interventions and restructuring, laid the foundation for further expansion in Mozambique by acquiring the majority shareholding in a terminal at the Port of Nacala, a developing logistics hub for the region and neighbouring countries.

Ships Agency and Clearing and Forwarding experienced increased competition, resulting in lower margins and volumes. This was exacerbated by declining volumes at South African ports.

Shipping reported a loss for the second consecutive year. Despite the challenging conditions, the division managed to outperform major rates indices. The division remains geared to benefit from increased demand, signs of which are evident in the dry-bulk market. The Shipping policy of investing in next-generation, eco-friendly vessels manufactured by reputable Japanese and Korean ship-builders ensures that it remains in the global lower cost quartile and meets increasingly stringent environmental regulations.

At year-end, Shipping owned, jointly owned and long-term chartered 26 dry-bulk (2015: 24) and 15 tanker vessels (2015: 14).

Seafreight continued to provide profitable feeder services between major ports in Mozambique, South Africa, Namibia and Angola. Ship-operating also performed well in a challenging market.

Cockett Marine Oil reported a loss on lower volumes, smaller margins, the impact of the cancellation of a lease contract and the provision for material doubtful debts.

Financial Services continued to grow profits and to generate a good return on capital, with strong growth in its balance sheet and third-party assets under management.

Expansion initiatives included finalising the establishment of the ETF CoreShares business as a separate entity and the merger of Asset Management and private equity house Infinitus Holdings Proprietary Limited to form Bridge Fund Managers. Retail will focus on ensuring that the interests of the 10.5 million SASSA grant beneficiaries are protected when the Net1 contract expires in March 2017.

Business sustainability

A continued focus on the Grindrod sustainability pillar of safety and health is evidenced in the improvement in the group’s safety record. Core to business sustainability is the safety of employees, contractors and visitors. I am saddened by the death of a Shipping employee in March during cargo-hold cleaning on
a dry-bulk ship. The incident was reported to the relevant authorities and investigated, and management continues to enforce strict adherence to safety procedures and in particular the specific procedure that was transgressed.

Improved efficiencies were achieved by combining operational management of Terminals, Rail, Carrier Logistics and Intermodal.

Shared Services continued to focus on improving cost efficiency and standardising commonly used business processes and systems. This service platform was reviewed in 2016 to ensure that its structure remains fit for purpose.

Shared Services HR manages employee development, a key factor in ensuring that people are adequately skilled for their positions and evaluated for professional growth. Development initiatives include training, talent-management and succession programmes. The service also manages the transformation of the workforce to reflect demographics, which is a priority in people issues.

Social investment remains focused on education and marine and coastal conservation, through Adopt-a-School and the Wildlands Conservation Trust, two
well-established organisations that achieve sustainable results.

The focus on environmental preservation covers a wide range of initiatives, measured against targets set in the Grindrod Vision 2020 manifesto.

Business safeguards

Responsible guidelines for quality, sustainability, legal compliance and ethical behaviour are entrenched in Grindrod’s governance structure to guide its decisions and actions in achieving business objectives.

Quality control in safety, health and environment are managed against international benchmarks. Freight Services embedded International Standards Organisation (ISO) criteria in its management systems, namely ISO 9001, ISO 14001 and Occupational Health and Safety Advisory Services 18001 (OHSAS 18001). Shipping conforms to stringent International Maritime Organisation (IMO) conventions and laws and all ships under Grindrod management are ISO 9001 and ISO 14001 certificated.

Risk management is an ongoing process, monitored and adjusted at board level through the risk committee. The top three risks in 2016 were shipping markets, commodity exposure and liquidity.

2017

There are signs that some markets are beginning to stabilise, although the supply-demand balance in Shipping remains fragile.

Despite poor trading conditions, the group remains cash generative at operating level and well positioned to capitalise on opportunities and investments outlined in its strategy and business plan.

I thank our customers, associates, partners, chairman and fellow directors for their support and trust – and express my deep appreciation for the sterling contribution employees and management made to stabilise and grow the business in a challenging environment.

Alan Olivier

Chief executive officer

1 March 2017


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